India Ratings and Research (Fitch Group) has revised India’s FY20 gross domestic product (GDP) growth downwards to 6.7% (six-year low) from its earlier forecast of 7.3%. The agency expects FY20 to be the third consecutive year of subdued growth pushed by (i) a slowdown in consumption demand; (ii) delayed and uneven progress of monsoon so far; (iii) decline in manufacturing growth; (iv) inability of Insolvency and Bankruptcy Code to resolve cases in a time-bound manner, and (v) rising global trade tension adversely impacting exports. Even quarterly, Q1FY20 is expected to be the fifth consecutive quarter of declining GDP growth as Ind-Ra expects it to come in at 5.7%.

On August 23, 2019, Finance Minister Nirmala Sitaraman announced a slew of measures to revive the economy, which included addressing some of the woes facing the auto sector, MSME, banking sector, capital market, etc. However, these measures are likely to support growth only in the medium term, but the agency expects GDP growth to recover to 7.4% in the 2HFY20, mainly on account of the base effect.

Private consumption, which has been the mainstay of aggregate demand, has come under pressure in urban as well as rural areas lately. While the reduced income growth of households has taken the sting out of the urban consumption, drought/near-drought conditions in three of the past five years coupled with the collapse of food prices have taken a heavy toll on rural consumption.

Even investment, particularly private corporate investment, has remained sluggish over the past few years. However, average investment growth, largely constituting government and corporate sector maintenance capex, at 9.2% during FY17-FY19 looks healthy vis-à-vis the average investment growth of 3.6% during FY14-FY16. Incremental or greenfield private corporate capex, although, is still missing. Since the major contributors to the economy’s investment pie are households (which include unorganised and unregistered enterprises, 38.6%) and private corporations (37.9%), their spending holds the key for reviving broad-based investment activity in the economy. While households’ major investment is in real estate, that of a private corporation is in machinery and equipment. Given the stress in the real estate sector and manufacturing sector capacity utilisation hovering in 70%-76% range since FY14, Ind-Ra believes the revival of private investment demand will be a long drawn process.

Of the other two demand-side growth drivers, government expenditure continues to be steady and is expected to grow at 10.6% in FY20 (FY19: 9.2%) while exports are facing headwinds due to rising trade tensions/weakening global GDP growth and is expected to grow at a subdued 7.2% in FY20.

Due to delayed and uneven monsoon, Ind-Ra expects agricultural gross value added (GVA) to grow at 2.1% in FY20, lower than FY19’s 2.9%. Overall GVA is expected to grow at a six-year low of 6.5% in FY20 (FY19: 6.6%), driven by services (7.9%) and industry (6.1%).

Food and crude oil prices, key drivers of inflation in India, are currently benign and likely to remain so during the remainder FY20. Ind-Ra expects inflation based on Wholesale Price Index and Consumer Price Index to remain moderate at 3.2% and 3.8%, respectively, in FY20 (FY19: 4.3% and 3.4%). This, the agency believes, will provide headroom to the Reserve Bank of India (RBI) to continue with its accommodative policy stance, thereby resulting in scope for more rate cuts in the near term (notwithstanding the 110 basis points rate cut so far in 2019). As a result, the 10-year G-Sec bond yield is expected to trade in the range of 6.1%-6.2% by FYE20.

FY20 fiscal deficit has been budgeted at 3.3% of GDP. In Ind-Ra’s assessment, tax revenue in FY20 may fall short by around INR1,500 billion from the budgeted figure, similar to the tax revenue shortfall observed in FY19. However, in view of RBI deciding to transfer INR1,760.51 billion (INR1,234.14 billion surpluses for FY19 and INR562.37 billion of excess provision) to the government, achieving FY20 fiscal deficit target will not be difficult.

The agency expects current account deficit to decline to 1.9% of GDP in FY20 from 2.1% of GDP in FY19, aided by softer crude oil prices. Even capital account is expected to record a surplus of USD72.0 billion supported by foreign direct investments, foreign portfolio investments and banking capital inflows. In view of these developments, Ind-Ra expects the Indian rupee to average 71.21 against the dollar in FY20.

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